Has Housing Touched Bottom?

Data suggests low but offers no hint on a return to healthier levels

In late January, the Census Bureau reported that new-home sales in December climbed at a seasonally adjusted rate month-over-month of 17.5% from 280,000 to 329,000. And the National Association of Realtors reported that pending home sales were up 2% in December versus expectations of (0.5%). This is considered to be a forward-looking indicator. (January numbers weren’t so good, dropping to a seasonally adjusted rate of 284,000 new-home sales, though bad weather may have influenced results).

The graph below shows new-home sales going back to 1963. You can see that from about 1999 through 2007, we were running well above the top end of the historical range. From there, we dropped to an all-time low.

New Home Sales & Recessions

It’s likely that the excesses of an almost decade-long housing bubble haven’t yet been wrung out of the system. But it’s also likely that we’ve seen the lows. Much more important in the movement of stocks than absolute levels are changes on the margin. It’s much less important that new-home sales are near all-time lows than that new-home sales are likely to trend higher from current levels. Even modest growth from rock-bottom lows in new-home sales is growth. The housing sector is a tremendous driver of employment in construction, of course, but also in home furnishings, appliances, mortgage processing, etc.

Like all markets, the new-home market is a balance of supply and demand. As we can see from the chart above, demand is near all-time lows. However, supply is contracting, too. The chart below shows new-home inventory.

Recessions & Home Inventory

According to the Census Bureau, months of new-home supply decreased to 6.9 in December from 8.4 in November. The “normal” level of months supply is just under 6 months, so the market has yet to fully work through its excess inventory. But it’s much closer than where it was in January 2009, which had 12.1 months of supply on the market.

The 2008 credit crisis closed the corporate debt markets, collapsed housing and destroyed jobs. Now, the corporate debt market is booming, and the housing and job markets appear to have put their worst days behind them.